Economic Growth and Development in China

TABLE OF CONTENTS

TABLE OF FIGURES

1 INTRODUCTION

2 THE „BIG PUSH“ AND INTERNATIONAL TRADE
2.1 THE „BIG PUSH“
2.1.1 MULTIPLE EQUILIBRIA
2.1.2 THE MARKET SIZE AND COORDINATION FAILURE
2.2 THE „BIG PUSH“AND INTERNATIONAL TRADE
2.2.1 THE MODEL OF TRINDADE
2.2.2 FREE TRADE RESTRICTIONS AND POSSIBILITIES
2.3 EVIDENCE FROM EAST-ASIA

3 CONCLUSION

REFERENCES

TABLE OF FIGURES

CHART 1: THE VICIOUS CIRCLE OF POVERTY

CHART 2: PER CAPITA GROWTH IN HISTORICAL DATA

1 Introduction

If the need for a „Big Push“ survives in an economy that is open to international trade and capital movements, or if openness to trade and capital movements is sufficient to overcome all poverty traps, these questions have daunted development economics since its inception (Jaime et al. 1997).

In the last two hundred years, every country with high development and productivity rates has industrialised. While in the eighteens century Britain, and in the twenties century Korea and Japan grew rich, other countries remained poor. One of the discussed causes for this underdevelopment might be the small domestic market. While the idea started with Rosenstein-Rodan (1943)¹, who thought the solution would be aid and investment programs, since the 1960s advocates tend to the Idea that openness of the economy resolve the problem of a small domestic market. The theory is that openness would induce an export-led „Big Push“ in terms of simultaneous growth over different sectors (Murphy et al.1989, p.1003).

In the current discussion the „Big Push“ induced by aid has its comeback in the Millennium Development Goals from the UN (Easterly 2005, p.3). The focus of this paper is on the East Asian countries, where the export-promotion-policy had had an important role. But Trindade (2005, p.41) was the first author who interpreted the coordination-problem as solvable with solely export-promotion, because of the naturally coordination effect of exports (Asche, 2005, p.24 gloss 28). So the question is not if exports are good for an economy, but if exports can induce a „Big Push“ and thus making aid superfluously.

This term paper is divided into three sections. In the first section the model assumptions of a „Big Push“, based on the model of Murphy et al. (1989) are presented. In the second part the “Big-Push”-theorem focus on the role of international trade, especially on the paper of Victor Trindade (2005). His model is presented and critical review of the possibilities of international trade follows. In the last section empirical evidence is shown by East Asia.

The target of this paper is to expose the relation between international trade and the „Big Push“. The basic question is if an open economy is sufficient to override a development trap or if it only makes economy grow, without inducing the „Big Push“.

2 The „Big Push“ and international Trade

2.1 The „Big Push“

The Idea of a „Big Push“ had been developed by Rosenstein- Rodan (1943) and later formalised by Murphy et al (1989).

The idea of Rosenstein-Rodan (1943) is that if various sectors of the economy adopt increasing-return-technology simultaneously, the created income can be source of demand for goods in other sectors.

If a country needs a „Big Push“ it is in a vicious circle, also called a development trap or a poverty trap. In case a country is in a development trap it’s meant an agricultural country² which has not jet industrialised. Because of that the underdevelopment trap is also called a non-industrialisation trap. One of the main sources of the trap is the lack of demand. In the later entered question, if an open economy is enough to override an underdevelopment trap and thus induce a „Big Push“, the assumptions of the Murphy et al. (1989) model are still valid in the model of Trindade (2005). These assumptions are multiple equilibria, the failing of the complementary industries to coordinate, the trap in an underdevelopment trap because of a small market. Additional the imitation of foreign goods, which makes the economies of scales possible.

2.1.1 Multiple equilibria

Murphy et al. (1989) observed that the idea behind the vicious circle is the multiplicity of equilibria.

Countries with a low level of income or capital stock, tends to a lower steady state then countries with a high level, which tends to higher steady state equilibrium (Asche, p.8). That means that a vicious circle is an equilibrium on a low level of development³. If the equilibrium is stabile it tends back to its steady state. So if it comes to an expansion, which is not high enough, the economy would grow shortly but then falls back to its old equilibrium.

Countries which are in vicious circles can’t elude from this situation by its own.

This vicious circle according to Nurske (1961, p.4ff) and taken up by Timmermann (1982, p. 125) can be seen in Chart 1. illustration not visible in this excerpt

Chart 1: The vicious circle of poverty

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¹ The Target-Region was southeast Europe.

² The agricultural workers are the working potential for the „Big Push“.

³ Poverty traps are not meant in the sense of zero growth. These traps are override by time. It is the level of the growth rate which is low in a vicious circle. The poor countries raise more slowly than the rich ones (Easterly 2005, p.2).